Bitfloor users are missing at least $267,000, according to one tally.

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More than two weeks after the Bitcoin exchange Bitfloor closed its virtual doors, many customers are still waiting to get their money back. One tally of 78 Bitfloor users on reddit found that Bitfloor owed them $267,000. The number might be much higher once all users are accounted for.

In an e-mailed statement, Bitfloor's legal counsel blamed the delay on a dispute with the firm's bank. And Bitfloor said it has enough funds deposited with the bank to "cover all of its customers' U.S. dollar credits on account."

Last month's Bitfloor shutdown ended a difficult year for the Bitcoin exchange, which had been the fourth most popular forum for trading Bitcoins for dollars. Hackers allegedly stole $250,000 from the exchange in September 2012. Bitfloor founder Roman Shtylman re-opened the exchange later that month in an ultimately unsuccessful effort to earn back the lost cash. Now some users are wondering if they'll lose even more.

"I'm fully aware of how risky purchasing and holding Bitcoin is," one Bitfloor user based on the West Coast told us by e-mail. The user opened a Bitfloor account earlier this year because of recommendations from other Bitcoin users. Our correspondent, who asked to remain anonymous, hoped the exchange's US location would make it easier to get legal recourse in case anything went wrong. The largest Bitcoin exchange, Mt. Gox, is based in Japan. Another popular exchange, Bitstamp, is based in Europe.

"In April, I decided to sell some of my bitcoins. So I sent my coins to my accounts at MtGox and Bitfloor and sold the coins for USD," the Bitfloor user told us.

Both exchanges require users to submit identity verification documents before dollars can be withdrawn. Our correspondent submitted documentation to both sites in mid-April. But a few days later, Bitfloor announced it was closing its doors "indefinitely."

"I am sorry to announce that due to circumstances outside of our control Bitfloor must cease all trading operations indefinitely," Shtylman wrote on the Bitfloor website on April 17. "Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past."

Bitfloor users panicked, rushing to convert their dollar holdings into Bitcoins (which were easier to withdraw). In the final minutes before trading was halted, the price of Bitcoins on Bitfloor spiked by about 10 percent relative to the value on other exchanges. Our source chose to hold onto dollars, trusting Shtylman's assurances that dollar-denominated funds were kept in FDIC-insured accounts.

Our correspondent's verification documents were approved a few days later. But a request to withdraw funds initiated about two weeks ago is still marked "pending." The user has several thousand dollars deposited with Bitfloor.

"Very little information has been provided since the 17th, and no information regarding how Bitfloor intends to make good on its promise to return funds," our correspondent told us. Bitfloor hasn't been responding to the individual's e-mails or tweets.

"The way that Roman has been handling this issue is very unprofessional," another user, who is out about $500, told us by e-mail. The user submitted verification documents on April 17, the day Bitfloor announced it was shutting down, but these documents have yet to be approved by Bitfloor.

"How this situation is being handled the way it is, is completely insane to me," an individual user who reportedly lost $32,000 wrote on reddit. "I get that his bank put him in a bad place, however, it's his behavior that is keeping him there. I don't want to get involved in a long, obnoxious lawsuit. It would be expensive and stressful and would definitely hurt public confidence in Bitcoin. However this sum of money is absolutely worth getting into one."

"I think Roman will be looking at a class action lawsuit if he doesn't get his act together," another user responded. "If that happens, please add my name to the list."

Reached by e-mail, Bitfloor legal counsel John Snyder repeated Shtylman's claim that the firm's bank was to blame.

"Bitfloor shares its customers' frustration with its bank's delay in providing access to funds currently in Bitfloor's account," Snyder told us. "Bitfloor has engaged legal counsel to assist in this matter. Through counsel, Bitfloor is in active dialogue with its bank and is taking all reasonable steps to facilitate the return of funds, consistent with Bitfloor's legal obligations."

"Bitfloor regrets this delay, thanks its customers for their patience to date, and appeals to its customers to continue to be patient as Bitfloor works diligently to resolve this situation."

Disclosure: I own some bitcoins, though thankfully they aren't held by Bitfloor.

Update: After this story went live, Snyder provided us with additional information. In an email statement he said that "the bank has not told us why it has delayed making available Bitfloor's U.S. dollar funds, but we are hopeful that this issue will be resolved soon. Bitfloor has sufficient U.S. dollar funds in its accounts to cover all of its customers' U.S. dollar credits on account." We've added this information to the second paragraph of the story above.

"Bitfloor shares its customers' frustration with its bank's delay in providing access to funds currently in Bitfloor's account," the spokesman said.

Smells fishy to me. It's possible that the site's execs may have burned through their USD holdings, spending lavishly like good Internet millionaires. Hence the bank's delay. Can't provide access to funds that aren't there.

- I am not trolling merely pointing out that just because the encryption and currency algorithms are safe does not mean that it is safe in practice. It is shocking that someone would put $32,000 in an unsafe place. This Roman Shtylman is a Russian with some shady associates https://bitcointalk.org/index.php?topic=106200.0 Maybe he arranged had a Russian "friend" who made him an offer.

Fair warning to all buyers, Bitinstant is struggling to honor direct withdrawals to BTC, and has been for about 3 weeks. They seem to be honoring withdrawals to Mt.Gox USD. There is a lengthy thread on the subject on the bitcointalk forums.

- I am not trolling merely pointing out that just because the encryption and currency algorithms are safe does not mean that it is safe in practice. It is shocking that someone would put $32,000 in an unsafe place. This Roman Shtylman is a Russian with some shady associates https://bitcointalk.org/index.php?topic=106200.0 Maybe he arranged had a Russian "friend" who made him an offer.

In your own wallet, in cold storage BTC is perfectly safe. Anywhere else......

If I'm going USD -> BTC, isn't the whole point that there's someone on the other end, trying to sell their BTC for USD?

Likewise, if I'm cashing out my BTC, isn't there someone on the other end trying to spend USD?

And the exchange is taking a cut of each transaction. Presumably that cut should be enough to keep the servers running. Why do these places go out of business if all the currency is provided by the users? This is an honest question, I'm curious about the business model.

Disclaimer: I own 0.17 bitcoins, but I'm a lazy newb and bought my original 0.1 BTC on ebay at an exhorbitant markup and haven't interacted with an actual exchange.

What I took from the article was that it was the people who had their money in USD who lost their money, whilst the people who converted them to Bitcoins successfully withdrew them.

Yea that's what I understood as well, here the problem is the REGULATED currency. The problem seems to be that they don't have access to their US Dollar bank accounts so they can't honor any of those withdrawals.

Its the regulation compliance that is getting exchanges into trouble. Has nothing to do with the security of Bitcoin and everything do with banks and et al being scared and/or pressured by FinCEN and govt. This process of 'holding' funds and suspending accounts started as early as two years ago as soon as the banks learned that the money flowing through was attached to Bitcoin. Some suspended accounts for 3-4 weeks, some re-opened after just a week, and others were forced to close out their accounts after reimbursing funds after a 2+ week suspension. It's been a real PITA for Bitcoin startups because of all the hoops you have to jump through just to make sure you're not money laundering.

The US government wants their cut, and has no problem damning anyone who doesn't.

Its the regulation compliance that is getting exchanges into trouble. Has nothing to do with the security of Bitcoin and everything do with banks and et al being scared and/or pressured by FinCEN and govt. This process of 'holding' funds and suspending accounts started as early as two years ago as soon as the banks learned that the money flowing through was attached to Bitcoin. Some suspended accounts for 3-4 weeks, some re-opened after just a week, and others were forced to close out their accounts after reimbursing funds after a 2+ week suspension. It's been a real PITA for Bitcoin startups because of all the hoops you have to jump through just to make sure you're not money laundering.

The US government wants their cut, and has no problem damning anyone who doesn't.

Which do you think is more likely: a global conspiracy against bitcoin exchanges, or a few crooks running off with the money and going "durr its the banks' fault that they're not letting me withdraw from what is now an empty account!"?

And about the government wanting their cut, they are legitimately due their share, as per the Constitution. So, yes, they do want their cut, and I see no reason why they shouldn't use their legitimately granted power to demand it.

What I took from the article was that it was the people who had their money in USD who lost their money, whilst the people who converted them to Bitcoins successfully withdrew them.

Yea that's what I understood as well, here the problem is the REGULATED currency. The problem seems to be that they don't have access to their US Dollar bank accounts so they can't honor any of those withdrawals.

Or so they say. Perhaps the bank is not letting them withdraw anything because the account is empty?

Its the regulation compliance that is getting exchanges into trouble. Has nothing to do with the security of Bitcoin and everything do with banks and et al being scared and/or pressured by FinCEN and govt. This process of 'holding' funds and suspending accounts started as early as two years ago as soon as the banks learned that the money flowing through was attached to Bitcoin. Some suspended accounts for 3-4 weeks, some re-opened after just a week, and others were forced to close out their accounts after reimbursing funds after a 2+ week suspension. It's been a real PITA for Bitcoin startups because of all the hoops you have to jump through just to make sure you're not money laundering.

The US government wants their cut, and has no problem damning anyone who doesn't.

It couldn't have anything to do with the banks being worried about complying with the dozens of different banking regulations including that pesky little thing called the Patriot Act right?

What I took from the article was that it was the people who had their money in USD who lost their money, whilst the people who converted them to Bitcoins successfully withdrew them.

Yea that's what I understood as well, here the problem is the REGULATED currency. The problem seems to be that they don't have access to their US Dollar bank accounts so they can't honor any of those withdrawals.

Or so they say. Perhaps the bank is not letting them withdraw anything because the account is empty?

I'm not denying that could be the case, I just didn't word it that way, I think it's entirely possible they are flat ass broke, which is why the bank is denying them access. But that still doesn't change the fact that the problem isn't with Bitcoins, it's with the bank, or the shady people who ran the exchange. (not that I won't admit that having to depend on shady people IS one of the problems I have with Bitcoins.)

I wonder if the silence isn because a NSL is involved. Perhaps some 'terrorists' used BTC to anonymously transfer some funds, and since this brokerage is in the US the assets are now frozen and they are prohibited from saying why?

Does this guy really expect people to believe that bank just took his money and won't tell him why? Either he doesn't have the money, the bank won't let him withdraw his funds and he KNOWS why, or else he is just trying to pocket the money.It seems very, very odd that a US bank is just flat refusing the let him withdraw from his account without giving any reasons as to why.

I wonder if the silence isn because a NSL is involved. Perhaps some 'terrorists' used BTC to anonymously transfer some funds, and since this brokerage is in the US the assets are now frozen and they are prohibited from saying why?

I guess this could be a reason, but still seems highly unlikely to me.

In your own wallet, in cold storage BTC is perfectly safe. Anywhere else......

Bitcoin isn't safe anywhere. You have to be able to convert your bitcoins into real money (or goods), and people are struggling to do that - and worse still, you see huge fluctuations in the value of bitcoin constantly. It fell down to $80 a coin again last week before rebounding to over $100. Some people could make a LOT of money doing this, but the problem is, speculating on bitcoin is insanely dangerous because at any moment, you can't know if that $80 is a temporary low, or the start of the permanent crash of the currency.

Bitcoin is fatally flawed as a means of exchange. It is too easy to manipulate the market, it is too dependent on shady people to get your money in and out of the system, the mining is just hilariously terribly wasteful, its value is far too unstable... the list goes on.

The only safe bitcoin is the one that you don't have.

Bongle wrote:

If I'm going USD -> BTC, isn't the whole point that there's someone on the other end, trying to sell their BTC for USD?

How is it that these exchanges go under?

If I'm going USD -> BTC, isn't the whole point that there's someone on the other end, trying to sell their BTC for USD?

Likewise, if I'm cashing out my BTC, isn't there someone on the other end trying to spend USD?

And the exchange is taking a cut of each transaction. Presumably that cut should be enough to keep the servers running. Why do these places go out of business if all the currency is provided by the users? This is an honest question, I'm curious about the business model.

A variety of reasons. The biggest possibilities are:

1) The exchange itself was shaving bitcoins, not USD. Thus, its assets were in BTC, and they had to convert from BTC to USD to pay their real world bills. If the value of the bitcoin tanks (and it did), then suddenly the amount that you shaved might not be enough anymore. At this point, the exchange becomes insolvent because it can't pay its bills and has to shut down. This is probably a best-case scenario, as it would mean that the money in people's accounts is really there.

2) The exchange just lumped a lot of money together, and just paid in and out of a big pool, from which it also deducted operating costs. Again, if some of their assets are in BTC and some in USD, if they can't convert back enough BTC to USD, this big pool might come up short. This would be extremely bad.

3) Fraud. There were more imaginary USD in the system than there were actual USD in the system, and so they pulled out of other people's accounts to try and close the gap, hoping that appreciation of bitcoins would eventually dig them out of the hole. With bitcoins falling down in value, the whole house of cards went down.

4) Liquidity trap. The money is trapped. They kept their assets in a combination of liquid and less-liquid assets (stocks, bonds, long-term savings accounts, ect.). If you stick tons of money into such assets, then go belly up, suddenly you have to get it all back out... this can range from "takes some time" to "outright impossible", depending on what the money is sunken into. Could even be on the bank's end, if enough money is involved and the bank is small.

5) The guy stole the money. Very plausible.

Leather Rope wrote:

Are you really waiting for a refund? Then you believe in the Easter Bunny too. Risky investments have risks.

These aren't investments really. They're accounts, like a bank would have. The money SHOULD be there.

JumpNDesign wrote:

The US government wants their cut, and has no problem damning anyone who doesn't.

Everyone who launders money and evades taxes is an enemy of every single American. There are no exceptions.

But the actual cause of the problems has nothing to do with it. It has to do with the fact that Bitcoin is ridiculously unstable as a currency, and people who run exchanges are likely to put assets in Bitcoin form. Not to mention criminal behavior.

LoneBagel wrote:

I wonder if the silence isn because a NSL is involved. Perhaps some 'terrorists' used BTC to anonymously transfer some funds, and since this brokerage is in the US the assets are now frozen and they are prohibited from saying why?

If your business is set up in that manner then you're probalby running your business poorly to begin with. Also, you can challenge them in court.

There are reasons to keep Bitcoins in an exchange: It provides liquidity. I can convert other currencies into Bitcoins and visa versa. I can also access my account on line, and pay for stuff. Plus, believe it or not, it's probably more secure. To access your wallet, you need to put your wallet on line. That's a big risk. Do you really know enough about computer security? I don't, and I've been working in this field for over 2 decades. Unless you make it your full time job, you simply can't do security properly.

Are you really waiting for a refund? Then you believe in the Easter Bunny too. Risky investments have risks.

These aren't investments really. They're accounts, like a bank would have. The money SHOULD be there.

One word: fractional-reserve banking. Banks don't have enough money to immediately return all their depositors' money. That's why you can have a bank run. Where an account pays interest, it can be seen as an investment. The return on money held in a halal bank account is the result of direct investment.

Ring-fencing only happens when it's required by law or a regulating body. Pension funds may be held under trust law. Even there, there can be problems, the law may allow the parent company to take out money when there's a surplus, which can lead to a shortfall should the stock market fall. Solicitors/attorneys may need to keep client money scrupulously separate from the firm's.

Where there are no legal or regulatory restraints, it's quite normal to use depositors' money to run the business, or payout dividends or loans to directors. Depositors are no different to other creditors, such as a supplier. In the UK, we've had a problem with Christmas Clubs. The business would pay out far too much in dividends, then go bankrupt just before Christmas, when it's obligations became due. (The UK has nothing like Chapter 11 bankruptcy, it's more like Chapter 7 Trustee, so it's often terminal.)